Corporate Financial Reporting and Analysis by David Young & Jacob Cohen

Author:David Young & Jacob Cohen [Young, David]
Language: eng
Format: epub
Publisher: Wiley
Published: 2013-02-25T08:00:00+00:00

Loan loss accounting basics

To illustrate the accounting for bad loans, consider a bank with €5000 in loans on the balance sheet and €100 in the loan loss reserve account as of the end of 2011. Net loans are therefore €4900:

On 25 May 2012, a loan in the amount of 5 is judged to be uncollectible and is written off. The bank records the following journal entry:

Loan loss reserve 5

Loans 5

The net loans remain at 4900. Note that the accounting for writing off loans largely parallels that of receivables. When receivables are written off, both the contra-asset and the receivables account are reduced, and net receivables are unchanged.

On 10 August 2012, a loan in the amount of 20 is deemed uncollectible and is written off. The journal entry will be similar to the one above:

Loan loss reserve 20

Loans 20

The net loan value on the books is still 4900 (4975 − 75).

At the end of 2012, bank management estimates that the loan loss reserve should be 120. The contra-asset account must therefore be increased by 45 (120 − 75). The bank records the following entry:

Loan loss provision 45

Loan loss reserve 45

Net loans are now 4855 (4975 − 120), a decrease of 45 from the beginning of 2012. The decrease results from the write-offs of (5 + 20), plus the net increase in the reserve (120 − 100, or 20).

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